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Accounting Interview Questions & Answers (Bones)

Here are the the almost of import Accounting concepts you need to know.

one. Walk me through the iii financial statements.

"The 3 major financial statements are the Income Argument, Balance Sheet and Cash Flow Statement.

The Income Statement gives the company's revenue and expenses, and goes downward to Net Income, the last line on the argument.

The Balance Canvass shows the company'southward Assets - its resource - such as Cash, Inventory and PP&E, also as its Liabilities - such every bit Debt and Accounts Payable - and Shareholders' Equity. Assets must equal Liabilities plus Shareholders' Equity.

The Cash Period Argument begins with Internet Income, adjusts for not-greenbacks expenses and working uppercase changes, so lists cash menses from investing and financing activities; at the stop, y'all see the company's net change in cash."

2. Can y'all give examples of major line items on each of the financial statements?

Income Argument: Acquirement; Price of Goods Sold; SG&A (Selling, General & Administrative Expenses); Operating Income; Pretax Income; Internet Income.

Balance Canvas: Cash; Accounts Receivable; Inventory; Plants, Property & Equipment (PP&E); Accounts Payable; Accrued

Expenses; Debt; Shareholders' Disinterestedness.

Greenbacks Flow Statement: Cyberspace Income; Depreciation & Amortization; Stock-Based Compensation; Changes in Operating Assets & Liabilities; Cash Catamenia From Operations; Majuscule Expenditures; Cash Menses From Investing; Sale/Purchase of Securities; Dividends Issued; Cash Menses From Financing.

three. How exercise the three statements link together?

"To necktie the statements together, Internet Income from the Income Statement flows into Shareholders' Equity on the Balance Sail, and into the top line of the Cash Menstruation Statement.

Changes to Residue Sheet items announced every bit working uppercase changes on the Cash Period Statement, and investing and financing activities affect Balance Sheet items such equally PP&E, Debt and Shareholders' Equity. The Greenbacks and Shareholders' Equity items on the Residue Sheet act as "plugs," with Greenbacks flowing in from the final line on the Cash Period Statement."

4. If I were stranded on a desert isle, only had 1 statement and I wanted to review the overall health of a visitor - which statement would I use and why?

You would apply the Cash Menstruum Statement because information technology gives a truthful picture of how much cash the company is actually generating, independent of all the not-cash expenses you might have. And that's the #1 thing you care about when analyzing the overall financial health of any concern - its greenbacks flow.

5. Let's say I could but expect at 2 statements to assess a visitor's prospects - which ii would I apply and why?

You would choice the Income Argument and Residue Sheet, considering yous can create the Cash Flow Statement from both of those (assuming, of course that you have "earlier" and "after" versions of the Balance Canvass that represent to the same period the Income Statement is tracking).

half dozen. Walk me through how Depreciation going up past $10 would affect the statements.

Income Statement: Operating Income would decline by $10 and assuming a 40% tax rate, Net Income would get downwardly by $6.

Cash Flow Argument: The Internet Income at the top goes down by $six, only the $10 Depreciation is a non-cash expense that gets added back, so overall Cash Flow from Operations goes upward by $iv. There are no changes elsewhere, so the overall Net Change in Greenbacks goes up by $4.

Balance Sheet: Plants, Property & Equipment goes down past $10 on the Assets side considering of the Depreciation, and Cash is up by $4 from the changes on the Cash Flow Statement.

Overall, Avails is downwards by $6. Since Internet Income fell by $vi as well, Shareholders' Equity on the Liabilities & Shareholders' Equity side is down by $6 and both sides of the Balance Sheet balance.

Note: With this blazon of question I always recommend going in the order:

1. Income Statement
2. Cash Flow Argument
3. Rest Sheet

This is then you can bank check yourself at the end and make certain the Remainder Sheet balances.

Call back that an Asset going up decreases your Cash Flow, whereas a Liability going up increases your Cash Flow.

7. If Depreciation is a non-greenbacks expense, why does it bear upon the cash remainder?

Although Depreciation is a non-cash expense, it is tax-deductible. Since taxes are a cash expense, Depreciation affects cash past reducing the amount of taxes you pay.

8. Where does Depreciation ordinarily show upward on the Income Statement?

It could exist in a separate line item, or it could be embedded in Cost of Goods Sold or Operating Expenses - every company does it differently. Annotation that the end outcome for bookkeeping questions is the same: Depreciation always reduces Pre-Tax Income.

9. What happens when Accrued Bounty goes up past $10?

For this question, confirm that the accrued bounty is at present beingness recognized equally an expense (as opposed to just changing not-accrued to accrued compensation).

Assuming that's the case, Operating Expenses on the Income Argument become up by $10, Pre-Tax Income falls by $10, and Internet Income falls by $six (assuming a 40% tax rate).

On the Cash Flow Statement, Net Income is down by $6, and Accrued Compensation will increase Cash Period by $x, and then overall Greenbacks Menstruum from Operations is up past $4 and the Cyberspace Modify in Cash at the bottom is up by $4.

On the Remainder Sheet, Cash is up by $4 as a result, and then Avails are up by $4. On the Liabilities & Equity side, Accrued Compensation is a liability and so Liabilities are up by $10 and Retained Earnings are downwards past $6 due to the Net Income, so both sides rest.

10. What happens when Inventory goes up by $10, assuming you pay for it with cash?

No changes to the Income Statement.

On the Cash Flow Statement, Inventory is an asset so that decreases your Cash Menstruum from Operations - it goes down by $10, as does the Net Change in Cash at the bottom.

On the Balance Canvass under Assets, Inventory is up by $10 but Greenbacks is downwardly by $10, and then the changes cancel out and Assets still equals Liabilities & Shareholders' Equity.

11. Why is the Income Argument non affected by changes in Inventory?

This is a common interview mistake - incorrectly stating that Working Capital changes show up on the Income Statement.

In the case of Inventory, the expense is only recorded when the goods associated with it are sold - so if it's just sitting in a warehouse, it does not count as a Cost of Skillful Sold or Operating Expense until the company articles it into a production and sells it.

12. Let's say Apple is ownership $100 worth of new iPod factories with debt. How are all 3 statements affected at the outset of "Year 1," before anything else happens?

At the start of "Year 1," earlier anything else has happened, at that place would be no changes on Apple's Income Statement (withal).

On the Greenbacks Menstruation Statement, the additional investment in factories would show upwardly under Cash Period from Investing as a net reduction in Cash Flow (so Cash Flow is down past $100 so far). And the additional $100 worth of debt raised would show upward as an addition to Cash Flow, canceling out the investment action. And so the cash number stays the same.

On the Balance Sheet, there is now an additional $100 worth of factories in the Plants, Property & Equipment line, so PP&E is up by $100 and Avails is therefore up past $100. On the other side, debt is up by $100 likewise then both sides residuum.

thirteen. Now let'due south exit i year, to the start of Yr 2. Presume the debt is loftier-yield so no principal is paid off, and assume an interest rate of 10%. Also assume the factories depreciate at a charge per unit of x% per year. What happens?

After a twelvemonth has passed, Apple must pay interest expense and must record the depreciation.

Operating Income would decrease by $10 due to the ten% depreciation charge each year, and the $10 in additional Interest Expense would decrease the Pre-Taxation Income by $20 altogether ($x from the depreciation and $10 from Interest Expense).

Bold a revenue enhancement rate of xl%, Net Income would fall by $12.

On the Cash Flow Statement, Net Income at the peak is downwards by $12. Depreciation is a non-greenbacks expense, so you lot add it back and the end result is that Cash Flow from Operations is down by $2.

That's the just alter on the Cash Menses Statement, so overall Cash is downwardly past $ii.

On the Residual Sheet, under Assets, Cash is down by $2 and PP&E is down by $10 due to the depreciation, so overall Assets are downward past $12.

On the other side, since Net Income was downward past $12, Shareholders' Equity is likewise downwardly past $12 and both sides balance.

Call up, the debt number under Liabilities does not change since we've assumed none of the debt is really paid dorsum.

fourteen. At the start of Year iii, the factories all break downwardly and the value of the equipment is written down to $0. The loan must also be paid back now. Walk me through the 3 statements.

Later on 2 years, the value of the factories is now $80 if we become with the 10% depreciation per year assumption. It is this $80 that we will write down in the 3 statements.

First, on the Income Statement, the $eighty write-downwardly shows up in the Pre-Tax Income line. With a forty% taxation charge per unit, Net Income declines by $48.

On the Cash Flow Statement, Internet Income is down by $48 but the write-downwards is a not­cash expense, so nosotros add together it back - and therefore Cash Flow from Operations increases by $32.

There are no changes nether Cash Catamenia from Investing, simply under Cash Menstruation from Financing in that location is a $100 charge for the loan payback - then Cash Flow from Investing falls by $100.

Overall, the Internet Alter in Cash falls by $68.

On the Balance Canvass, Cash is at present down past $68 and PP&East is down by $80, so Assets have decreased by $148 birthday.

On the other side, Debt is downwards $100 since it was paid off, and since Net Income was downward by $48, Shareholders' Equity is down by $48 as well. Altogether, Liabilities & Shareholders' Equity are down by $148 and both sides residuum.

15. Now let's await at a different scenario and assume Apple is ordering $x of additional iPod inventory, using cash on manus. They gild the inventory, simply they have not manufactured or sold annihilation notwithstanding - what happens to the three statements?

No changes to the Income Argument.

Cash Flow Statement - Inventory is upward by $10, so Cash Menstruation from Operations decreases by $10. There are no further changes, so overall Cash is downwardly by $ten.

On the Balance Canvas, Inventory is up by $x and Cash is downwards past $10 and so the Avails number stays the same and the Balance Sheet remains in balance.

16. Now permit'southward say they sell the iPods for acquirement of $20, at a cost of $10. Walk me through the three statements under this scenario.

Income Statement: Revenue is upwards by $20 and COGS is upwards by $10, so Gross Profit is upwards by $10 and Operating Income is up by $x too. Assuming a 40% taxation rate, Net Income is upwardly by $half dozen.

Cash Menses Statement: Internet Income at the top is up past $6 and Inventory has decreased past $10 (since nosotros but manufactured the inventory into real iPods), which is a net add-on to cash menses - so Cash Flow from Operations is up by $16 overall.

These are the only changes on the Cash Flow Statement, so Internet Change in Cash is up past $16.

On the Residue Sheet, Cash is upward by $16 and Inventory is down past $10, then Avails is up past $6 overall.

On the other side, Net Income was upward past $6 so Shareholders' Disinterestedness is upward past $6 and both sides residuum.

17. Could you ever cease up with negative shareholders' equity? What does it mean?

Yep. It is common to run into this in 2 scenarios:

1. Leveraged Buyouts with dividend recapitalizations - information technology ways that the owner of the company has taken out a large portion of its equity (usually in the form of greenbacks), which can sometimes turn the number negative.
2. It can also happen if the company has been losing money consistently and therefore has a failing Retained Earnings balance, which is a portion of Shareholders' Equity.

It doesn't "mean" anything in particular, but it tin can be a crusade for concern and possibly demonstrate that the company is struggling (in the second scenario).

Note: Shareholders' equity never turns negative immediately subsequently an LBO - it would only happen following a dividend recap or continued net losses.

18. What is working capital letter? How is it used?

Working Capital = Current Avails - Electric current Liabilities.

If it'southward positive, it means a company can pay off its short-term liabilities with its short-term assets. It is often presented every bit a financial metric and its magnitude and sign (negative or positive) tells you whether or non the company is "sound."

Bankers look at Operating Working Upper-case letter more than commonly in models, and that is divers as (Electric current Assets - Cash & Cash Equivalents) - (Current Liabilities - Debt).

nineteen. What does negative Working Capital mean? Is that a bad sign?

Not necessarily. It depends on the blazon of company and the specific situation - hither are a few dissimilar things it could mean:

1. Some companies with subscriptions or longer-term contracts oftentimes have negative Working Capital because of high Deferred Revenue balances.
2. Retail and eating house companies like Amazon, Wal-Mart, and McDonald'due south often have negative Working Majuscule because customers pay upfront - then they can employ the cash generated to pay off their Accounts Payable rather than keeping a large cash residue on-hand. This can be a sign of business efficiency.
3. In other cases, negative Working Majuscule could point to fiscal trouble or possible bankruptcy (for example, when customers don't pay quickly and upfront and the company is carrying a high debt balance).

20. Recently, banks have been writing downwardly their assets and taking huge quarterly losses. Walk me through what happens on the 3 statements when there'southward a write­downwardly of $100.

First, on the Income Argument, the $100 write-down shows upward in the Pre-Tax Income line. With a 40% tax charge per unit, Cyberspace Income declines past $60.

On the Cash Flow Statement, Net Income is downwardly by $60 just the write-down is a non­greenbacks expense, so we add it back - and therefore Cash Flow from Operations increases past $40.

Overall, the Net Modify in Greenbacks rises by $twoscore.

On the Balance Sheet, Greenbacks is at present up by $40 and an asset is downwardly by $100 (it's non clear which asset since the question never stated the specific asset to write-downwardly). Overall, the Assets side is down by $threescore.

On the other side, since Cyberspace Income was down by $60, Shareholders' Equity is likewise downward by $sixty - and both sides balance.

21. Walk me through a $100 "bailout" of a visitor and how it affects the 3 statements.

Commencement, confirm what type of "bailout" this is - Debt? Equity? A combination? The nigh common scenario here is an equity investment from the government, so here's what happens:

No changes to the Income Statement. On the Cash Menstruation Statement, Cash Flow from Financing goes up by $100 to reflect the government's investment, and so the Net Change in Cash is up past $100.

On the Residuum Sheet, Cash is up by $100 then Assets are up by $100; on the other side, Shareholders' Equity would go up by $100 to brand it balance.

22. Walk me through a $100 write-downwards of debt - every bit in OWED debt, a liability - on a visitor'southward balance canvass and how information technology affects the 3 statements.

This is counter-intuitive. When a liability is written downwardly you record information technology as a gain on the Income Argument (with an asset write-downward, it'south a loss) - so Pre-Tax Income goes up by $100 due to this write-down. Bold a 40% tax rate, Internet Income is up by $sixty.

On the Cash Flow Statement, Net Income is up by $60, but we need to decrease that debt write-down - and so Greenbacks Catamenia from Operations is down by $40, and Internet Change in Cash is down by $40.

On the Residuum Sheet, Cash is down by $twoscore so Avails are downwards by $forty. On the other side, Debt is downwardly by $100 but Shareholders' Equity is upwardly by $lx because the Internet Income was up by $sixty - and then Liabilities & Shareholders' Equity is down by $twoscore and it balances. If this seems strange to you, you're not alone - run across this Forbes commodity for more on why writing down debt actually benefits companies accounting-wise:

http://world wide web.forbes.com/2009/07/31/fair-value-accounting-markets-equities-fasb.html

23. When would a visitor collect cash from a customer and not record it as revenue?

Three examples come to listen:

1. Web-based subscription software
2. Cell telephone carriers that cell annual contracts
3. Magazine publishers that sell subscriptions

Companies that agree to services in the future often collect cash upfront to ensure stable revenue - this makes investors happy as well since they tin improve predict a company's performance.

Per the rules of GAAP (Generally Accepted Accounting Principles), yous just record revenue when you actually perform the services - so the company would not tape everything equally revenue right away.

24. If cash collected is not recorded as revenue, what happens to information technology?

Usually it goes into the Deferred Revenue residuum on the Residue Sheet under Liabilities.

Over time, equally the services are performed, the Deferred Revenue balance "turns into" real acquirement on the Income Statement.

25. What's the difference between accounts receivable and deferred revenue?

Accounts receivable has not yet been collected in cash from customers, whereas deferred revenue has been. Accounts receivable represents how much revenue the company is waiting on, whereas deferred acquirement represents how much it is waiting to tape every bit acquirement.

26. How long does it normally have for a company to collect its accounts receivable balance?

More often than not the accounts receivable days are in the 40-50 day range, though it's higher for companies selling high-end items and it might be lower for smaller, lower transaction-value companies.

27. What'south the deviation between cash-based and accrual accounting?

Cash-based accounting recognizes revenue and expenses when greenbacks is actually received or paid out; accrual accounting recognizes acquirement when collection is reasonably certain (i.e. after a customer has ordered the product) and recognizes expenses when they are incurred rather than when they are paid out in cash.

Near big companies use accrual accounting because paying with credit cards and lines of credit is so prevalent these days; very minor businesses may use cash-based bookkeeping to simplify their financial statements.

28. Let's say a customer pays for a TV with a credit card. What would this expect like under cash-based vs. accrual accounting?

In cash-based accounting, the revenue would not show upwards until the company charges the customer'south credit menu, receives potency, and deposits the funds in its bank account - at which indicate it would prove upward as both Acquirement on the Income Statement and Cash on the Residue Sheet.

In accrual accounting, it would evidence up as Acquirement right abroad but instead of appearing in Greenbacks on the Remainder Sheet, it would go into Accounts Receivable at first. Then, once the cash is really deposited in the company'southward banking concern account, information technology would "turn into" Cash.

29. How do you decide when to capitalize rather than expense a purchase?

If the nugget has a useful life of over i year, information technology is capitalized (put on the Balance Canvas rather than shown equally an expense on the Income Statement). And then it is depreciated (tangible assets) or amortized (intangible assets) over a certain number of years.

Purchases like factories, equipment and land all terminal longer than a yr and therefore show up on the Rest Canvass. Employee salaries and the price of manufacturing products (COGS) only cover a short period of operations and therefore show upwardly on the Income Statement as normal expenses instead.

30. Why do companies report both GAAP and non-GAAP (or "Pro Forma") earnings?

These days, many companies have "non-cash" charges such equally Amortization of Intangibles, Stock-Based Compensation, and Deferred Revenue Write-downwardly in their Income Statements. Every bit a outcome, some debate that Income Statements under GAAP no longer reflect how profitable most companies truly are. Non-GAAP earnings are virtually ever college because these expenses are excluded.

31. A company has had positive EBITDA for the by 10 years, merely it recently went bankrupt. How could this happen?

Several possibilities:

1. The company is spending too much on Majuscule Expenditures - these are not reflected at all in EBITDA, only information technology could still be cash-menses negative.
2. The visitor has high involvement expense and is no longer able to beget its debt.
3. The company's debt all matures on one date and it is unable to refinance it due to a "credit crunch" - and it runs out of cash completely when paying back the debt.
4. It has pregnant one-fourth dimension charges (from litigation, for example) and those are loftier plenty to broke the company.

Remember, EBITDA excludes investment in (and depreciation of) long-term avails, involvement and one-fourth dimension charges - and all of these could end upward bankrupting the visitor.

32. Normally Goodwill remains constant on the Rest Sheet - why would it be impaired and what does Goodwill Impairment mean?

Usually this happens when a company has been acquired and the acquirer re-assesses its intangible assets (such as customers, brand, and intellectual property) and finds that they are worth significantly less than they originally thought.

It oft happens in acquisitions where the buyer "overpaid" for the seller and tin result in a large cyberspace loss on the Income Statement (see: eBay/Skype).

Information technology tin can as well happen when a visitor discontinues part of its operations and must impair the associated goodwill.

33. Under what circumstances would Goodwill increase?

Technically Goodwill can increment if the visitor re-assesses its value and finds that information technology is worth more than, but that is rare. What usually happens is 1 of 2 scenarios:

1. The visitor gets acquired or bought out and Goodwill changes as a result, since it's an accounting "plug" for the purchase price in an acquisition.
2. The company acquires another company and pays more than what its avails are worth - this is and so reflected in the Goodwill number.

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Source: https://finexecutive.com/en/news/accounting_interview_questions__answers_basic_2_4_2015

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